1. Field of the Invention
The invention disclosed herein relates generally to an investment instrument. More particularly, the present invention relates to a method for creating and administering an investment instrument which enables investors to choose between levels of participation in financial market activity while protecting their principal investments. The investment instrument may also have relatively short terms and/or may clear through a depository.
2. Description of the Prior Art
Existing investment instruments typically allow an individual to invest a given amount of principal and to earn either a fixed, guaranteed rate of return (or “interest”) or a flexible rate of return that is not guaranteed. As described in further detail below, an “investment instrument” is any means by which an investor may invest principal. “Principal” refers to the amount of an investor's initial investment in an investment instrument, plus any interest earned, minus any payments or disbursements made to the investor from the investment instrument and any withdrawal penalties. Thus, principal is different from “face value,” which is the amount an investment instrument is worth “on its face” and typically corresponds to the amount initially invested in the instrument—i.e., without added interest. For the purposes of this specification, “interest” and “return” are synonymous terms, meaning the amount earned by an investment instrument.
Typically, guaranteed investments offer lower potential returns and lower risk than flexible-rate investments. An example of a very low-risk, low-return investment is a Certificate of Deposit. A CD is a fixed income financial instrument, typically issued by a bank or similar financial institution, that guarantees a fixed return on investment. Though the rate of return on a CD may sometimes be set with a flexible interest rate, such as the federally set interest rate, there is still a guaranteed return on the investment. Furthermore, the principal invested in a CD is protected, so an investor will not lose principal even if market conditions become extremely unfavorable. When a CD matures at the end of its term, a customer may “roll over” the CD. To “roll over” a CD means to reinvest the original principal and, if desired, the earned interest, into a new CD for another term. One drawback of a CD is that funds invested in a CD do not participate in equity markets, which may potentially offer significantly higher returns than a CD.
At the opposite end of the risk/return spectrum, equities are high-risk investments with a potential for very high return. This class of investments typically takes the form of stock certificates, or “shares,” issued by corporations. Each share represents an ownership interest in the corporation equal to the percentage of shares held. Stock certificates are traded on financial “markets,” or “exchanges,” throughout the world, such as the NASDAQ (“National Association of Securities Dealers Automatic Quotation”), the NYSE (“New York Stock Exchange”), and the French Cotation Assite Continue (“Quotes Assisted Live” or “CAC4O”). For the purposes of this specification, the terms “market” and “exchange” mean any financial, commodities, or any other relevant market known to those skilled in the art. As shares trade on exchanges, their values rise and fall in accordance with demand for the shares. Equity investors can achieve extraordinary returns on their investment if demand for their shares increases, but they also risk losing their entire principal if the company that issued the shares goes out of business, enters bankruptcy, or otherwise fails to create demand for their shares.
One variation on equity investments is the mutual fund. Mutual funds are collections of stocks, bonds, or other investments pooled within a common fund. Consumers buy shares in the fund, which is managed by an investment advisor. The manager decides how to invest the fund's assets. As the investments held by the fund generate income or generally rise in value, so does the value of the fund's shares. While it is possible to lose the principal investment, the risk of loss is spread across multiple equity investments and, thus, is typically less than the risk of investing in individual stocks. One drawback of a mutual fund is that each shareholder is responsible for fund fees and other charges incurred when the fund liquidates assets. While mutual funds typically have higher rates of return than CDs or other fixed interest investments, they seldom offer the potential for returns as high as those possible with individual stocks. Furthermore, though investing in mutual funds is typically less risky than buying individual stocks, it is still possible to lose principal.
Thus, a need exists for an investment instrument that allows investors to choose a level of participation in the activity of financial markets while also protecting their principal investments. Some currently available investment instruments seek to provide similar opportunities for investors. However, these instruments typically have terms that are longer than one year. For example, many banks offer CDs in which interest is indexed to a stock market or other financial index. However, the terms of those CDs are typically three to five years in length. Thus, an investor may not be able to freely change from one investment risk strategy to another at the end of each year (or similar short term period), but must instead wait for the end of the longer term. Investors in CDs who wish to change investments before the end of a term must typically pay a penalty for withdrawing their money. Therefore, a need also exists for an investment instrument that gives investors a choice of participation levels and protects their principal and, in addition, has a relative short term.
Finally, it may be advantageous for an issuer of an investment instrument to clear that instrument through a depository, such as the Depository Trust Company. Typically, instruments that clear through a depository have longer terms and do not give investors the choice of participation levels in financial markets. Thus, a need exists for an instrument that allows investors to choose levels of participation in financial markets, protects the investors' principal, has relatively short terms and/or is cleared through a depository.